Cramer: Small Drug Stocks with Promising Pipelines

There is a whole new generation of drug companies ready to take on what big pharma was in the '90s, says Mad Money host Jim Cramer. A close look at speculative drug stocks, including Alexion and BioMarin.

"An orphan drug is one that treats an incredibly rare disease," explained Jim Cramer. "In the United States that's a disease that afflicts less than 200,000 people, and in Europe, it's one that occurs in no more than 0.05% of the population."

Cramer realizes that may sound counter-intuitive – these drugs have a relatively small customer base, which suggests demand will never be a substantial catalyst. However, he believes there are other catalysts which will more than offset the demand issue.

"For starters, the FDA tends to go much easier on orphan drugs because they know there aren't any other alternatives for people with these rare diseases," Cramer said. "Second, once orphan drugs get approved, the companies that make them price these medications at truly astronomical levels, these drugs can cost hundreds of thousands of dollars of year."

Also Cramer said the government provides orphan drug developers with all sorts of incentives, such as tax relief, enhanced patent protection, subsidized clinical research, and years of marketing exclusivity.

All told, "I think orphan drugs are the sweet spot of the industry," Cramer concluded.

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If you agree with the thesis, two of Cramer's favorites are Alexion and BioMarin.

"I first recommended these names about two-and-a-half years ago, in October of 2010, and since then Alexion has rallied 178%, while BioMarin's rallied 184%. Those are some fantastic moves, and I think these two stocks have much more room to run," Cramer said.